Hello Party People
Hey people its the ASAP doomsayer back on the board....wish i would have gone to the reunion just to shove the bond team's credit crash thesis that i gave 50 slides on by myself to a well attended final board meeting down all those mediocre douchebags throats.
There are three great things about a credit crunch:
1) There will be a cleansing of the system of all the bad / avg. excess analysts, bankers, PMs that were enjoying a better job, and thus standard of living, than their particular skills deserved.
2) People are set to see their unsustainable spending vehicles - i.e. $2 trillion in credit card lines & $10 trillion in HH RE equity - that they have become as reliant on as a crackhead is on his next hit of poor man's cocaine. Now people are going to be forced to save money, spend less money on meaningless bullshit, and begin to de-leverage their HH balance sheet.
3) THERE ARE A TON OF MONEY MAKING OPPORTUNITIES!!!! ST we have unprecedented volatility and LT we have great values out there in many different markets across the globe and in different asset classes. Unfortunately equities is not one of them right now given the yields offered in Inv. Grade and HY debt, not to mention some of the credit derivatives. So until yields converge it seems unlikely that the lower end of capital structure is going to produce better returns over the Intermediate or Long Term than 20% esque yields in HY debt. Dougie boy has to be licking his chops right now.
Oh, one other thing....given that the Gov't has thrown $8.5trillion towards a problem that it can't fix I would say that there is a lot more paper flying around out there right now and so I think GOLD (and silver) are steals right here.
B.Brey
There are three great things about a credit crunch:
1) There will be a cleansing of the system of all the bad / avg. excess analysts, bankers, PMs that were enjoying a better job, and thus standard of living, than their particular skills deserved.
2) People are set to see their unsustainable spending vehicles - i.e. $2 trillion in credit card lines & $10 trillion in HH RE equity - that they have become as reliant on as a crackhead is on his next hit of poor man's cocaine. Now people are going to be forced to save money, spend less money on meaningless bullshit, and begin to de-leverage their HH balance sheet.
3) THERE ARE A TON OF MONEY MAKING OPPORTUNITIES!!!! ST we have unprecedented volatility and LT we have great values out there in many different markets across the globe and in different asset classes. Unfortunately equities is not one of them right now given the yields offered in Inv. Grade and HY debt, not to mention some of the credit derivatives. So until yields converge it seems unlikely that the lower end of capital structure is going to produce better returns over the Intermediate or Long Term than 20% esque yields in HY debt. Dougie boy has to be licking his chops right now.
Oh, one other thing....given that the Gov't has thrown $8.5trillion towards a problem that it can't fix I would say that there is a lot more paper flying around out there right now and so I think GOLD (and silver) are steals right here.
B.Brey
posted by Not Sure if Al Gore or Global Warming is a Bigger Joke at
10:17 PM
13 Comments:
There is a cleansing of the system alright, but it is not discriminating between good analysts and bad analysts. People are cleaning house and there is very little analysis going into a lot of it other than "highest cost" or "last in, first out". I'm not sure that's a good thing, but I'm biased.
I'll be leaving Waddell at the end of the year due to no choice of my own. Without being overly arrogant, my relative performance in 2008 is outstanding and it won't end up mattering at all. Last in, first out.
I guess I can take solace in the fact that I know I will land somewhere. I am amazed at the number of opportunities that are out there. They may not be ideal, but I can do anything or live anywhere for a few years.
I see no reason to own equities at present time.
The average high yield bond is at 21%. The implied default rate is somewhere around 18%. It peaked at somewhere around 12% in the 2001-3 downturn. This was at the height of the broadband/telecom bust where names like Global Crossing and At Home made up something like 30% of the High Yield index. If high yield stays where it is, you will be receiving an average of a 10% coupon on an average of a 68 dollar price... that's 14.5% return with no price appreciation. If/when high yield turns the corner and starts to appreciate, you'll be looking at returns in the 30-50% context.
Bank debt is in the low 70's. It isn't generating a ton of coupon, but most of these are par pieces of paper based solely on asset value.
I can find solid BB names that I cover that will get you 20% yields with, in my opinion, fairly limited downside.
If anyone has any ideas for jobs, I'm listening. I'm willing to look at bank debt, high yield, or equity... mutual fund, hedge fund, insurance company, or whatever else.
One other thing. I am in 100% agreement on gold.
There are two reasons I like it. The first is what Ben mentioned... all of these bailouts are inflationary. They are artificially propping up asset prices. The second reason I like it is I view it as a hedge to a total meltdown scenario.
Regarding inflation, I have 2 questions.
1) How does a change in the velocity of money impact your view (I am assuming it is dropping off a cliff)?
2) If the govt creates $100 billion, gives it to a bank or insurance company, where it evaporates due to a decline in asset values, has the monetary base expanded? Assuming the net monetary growth is still positive, is it enough to be inflationary?
I have no intelligent thought on inflation. These are a couple of thoughts I have been pondering. Interested in responses.
1) Personally, I'm not overly concerned with the velocity of money (or lack therefore of). Eventually, that will return to a normal rate. True, prices will be lower in the short term, but I think the market is keenly aware of that. The worry is in the expansion of the monetary base. That problem pretty much created what we are going through now.
2) Money doesn't evaporate. If giving the money to a bank allows them to meet capital requirements and stay in business longer, the money is going to be transferred somewhere else. Even shitty banks aren't not lending... they're just a lot choosier over who they are lending to, in what amounts, and what the terms are.
In the short term, perhaps the right thing to do is to prop up asset values (including the capital base of banks) in order to prevent the market from totally hitting the fan.
In the long term, expanding the monetary base is inflationary in the sense that it devalues $1. It will create an asset bubble. The question is where. Longer term, the expansion of the U.S. balance sheet points towards a weaker dollar. Gold is simply a play on that.
It is just like school, people are newspaper reporters instead of investors. If their is deflation they tell you there is deflation, if there is inflation they tell you there is inflation.
In my mind being in this business is seeing the future not the present. However our jobs are reporting on the present. I am a shitty analyst.
Being a reporter is the analysts job so some of us are good at it.
In case anyone is interested, this is a more intelligent version of the point of view I asked about.
http://www.frontlinethoughts.com/article.asp?id=mwo120508
It is just funny to me that I articulated this view many times on this blog, and I distinctly remember articulating it at school before it happened when everyone was talking about inflation. And I remember having arguments about why I thought the bond team to be long duration and not short.
And now that the thesis is pretty exactly priced into the market with zero percent rates, the idea is being thrown out like it is genius and non consensus.
The journal may be hiring. And honestly I may try to get a job there, that is what I do. I am an analyst.
That's outstanding you were talking about this 3 years ago. Way to go. I bet somewhere there's a trophy with your name on it just waiting to be held up over your head.
Yep maybe I will get a job at the journal. You seem to be one up on me.
Or maybe you can teach me how to day trade.
I think the autos may get a bail out.
Ben, you were right on the credit dabacle, while your predictions on 7% inflation, as I see, is the government solution to it rather than a fact. We'll be lucky to end up with a stagflation instead of depression/debt deflation.
The other solution, as I see, is to let China leverage up so as to fill the credit void of the US deleveraging. China has roughly same amount of M2 as the US has around $8trillion, but China only has a nominal GDP less than one third of the US. If the Chinese money would be allowed to leverage up, the global debt deflation could be avoided. However, this requires the US to give away much of their asset ownderships to the Chinese to pay off their debts.
In return, China should allow a floating exchange rate system.
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